40 Things To Know Before Entering The Stock Market

11. Stock Derivatives

Also known as an equity derivative, a stock derivative is a financial instrument which has an underlying asset that’s the price of an equity. The two main types of contracts found on stock derivatives are futures and options. Examples of underlying security include an individual firm’s stock or a stock index.

A buyer who is purchasing a long contract is better off buying a future. These types of stock derivatives are delivered via cash settlement. When it comes to stock options, a call option gives the buyer the right to purchase stock at a fixed price in the future. With this method, most stock options are transferable.